S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September
30, 2012

£
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

For the transition period from to

Commission File Number 000-53167

American
sands energy Corp.

(Exact name of registrant as specified in its charter)

Delaware

87-0405708

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

4760 S. Highland Drive

Suite 341

Salt Lake City, UT 84117

(Address of principal executive offices)

(801) 699-3966

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed under Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes S No £

Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes S No £

Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.

Large Accelerated Filer £

Accelerated Filer £

Non-Accelerated
Filer £ (Do not check if a smaller reporting company)

Smaller Reporting Company S

Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £
No S

The issuer had 28,816,741 shares of common
stock, $.001 par value, outstanding as of November 8, 2012.

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

3

Item 1. Financial Statements

3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

See the accompanying
notes to condensed consolidated financial statements.

3

American Sands Energy Corp.

(A Development Stage Company)

Condensed Consolidated Statements of Operations (Unaudited)

For the Three

For the Three

For the Six

For the Six

Cumulative From

Months Ended

Months Ended

Months Ended

Months Ended

Inception to

September 30, 2012

September 30, 2011

September 30, 2012

September 30, 2011

September 30, 2012

Revenues

$

–

$

–

$

–

$

–

$

–

Operating expenses:

Selling, general and administrative

424,878

297,446

933,026

1,138,084

7,416,549

Research and development

106,255

99,605

186,164

99,605

622,572

Mineral lease expense

53,261

53,244

106,522

27,336

1,427,829

Total operating expenses

584,394

450,295

1,225,712

1,265,025

9,466,950

Loss from operations

(584,394

)

(450,295

)

(1,225,712

)

(1,265,025

)

(9,466,950

)

Other income (expense):

Interest expense

(139,179

)

(88,423

)

(278,387

)

(104,846

)

(786,964

)

Interest income

–

574

–

860

22,985

Other income (expense)

–

–

–

–

(2,000

)

Total other income (expense)

(139,179

)

(87,849

)

(278,387

)

(103,986

)

(765,979

)

Net loss before provision for income taxes

(723,573

)

(538,144

)

(1,504,099

)

(1,369,011

)

(10,232,929

)

Provision for income taxes

–

–

–

–

(950

)

Net loss

$

(723,573

)

$

(538,144

)

$

(1,504,099

)

$

(1,369,011

)

$

(10,233,879

)

Net loss per common share - basic and diluted

$

(0.03

)

$

(0.02

)

$

(0.05

)

$

(0.07

)

Weighted average common shares outstanding - basic and diluted

28,784,873

22,052,163

28,636,575

18,362,510

See the accompanying
notes to condensed consolidated financial statements.

4

American Sands Energy Corp.

(A Development Stage Company)

Condensed Consolidated Statement of Stockholders' Deficit

For the Six Months Ended September 30, 2012 (Unaudited)

Deficit

accumulated

Common stock

Additional

during the

Total

paid-in

development

stockholders’

Shares

Amount

capital

stage

deficit

Balance as of April 1, 2012

27,676,960

$

27,677

$

4,811,313

$

(8,729,780

)

$

(3,890,790

)

Shares issued to satisfy deposits to purchase common stock

634,796

635

709,579

–

710,214

Common stock issued for cash at $1.15 per share

454,985

455

491,564

–

492,019

Common stock issued for services at $1.15 per share

50,000

50

57,450

–

57,500

Stock-based compensation

–

–

216,288

–

216,288

Issuance of stock options to consultants

–

–

3,070

–

3,070

Net loss

–

–

–

(1,504,099

)

(1,504,099

)

Balance as of September 30, 2012

28,816,741

$

28,817

$

6,289,264

$

(10,233,879

)

$

(3,915,798

)

See the accompanying
notes to condensed consolidated financial statements.

5

American Sands Energy Corp.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Six

For the Six

Cumulative From

Months Ended

Months Ended

Inception through

September 30, 2012

September 30, 2011

September 30, 2012

Cash flows from operating activities:

Net loss

$

(1,504,099

)

$

(1,369,011

)

$

(10,233,879

)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation

168

10

5,894

Gain on disposal of fixed assets

–

–

(49

)

Accretion of debt discount

159,721

64,629

462,931

Straight-line of mineral lease payable

(9,760

)

(9,759

)

24,399

Stock issued for consulting services

57,500

–

57,500

Stock-based compensation expense

216,288

584,061

1,427,333

Issuance of stock options to consultants

3,070

–

9,033

Special warrants issued as payment for leases

–

–

188,160

Notes payable issued as payment for leases

–

–

126,840

(Increase) decrease in operating assets:

Receivables

382,500

–

–

Prepaid and other current assets

101,676

91,857

(136,017

)

Increase (decrease) in operating liabilities:

Accounts payable

(333,004

)

114,946

203,805

Accrued expenses

10,912

(146,888

)

2,922,348

Accrued interest on convertible debt

118,666

39,829

246,095

Net cash used in operating activities

(796,362

)

(630,326

)

(4,695,607

)

Cash flows from investing activities:

Acquisition of property and equipment

–

(588

)

(8,524

)

Disposal of property and equipment

–

–

588

Net cash used in investing activities

–

(588

)

(7,936

)

Cash flows from financing activities:

Proceeds from issuance of notes payable

–

400,000

437,000

Proceeds from issuance of convertible notes payable

–

–

745,000

Proceeds from issuance of notes payable, related party

–

–

25,000

Proceeds from issuance of common stock and special warrants

492,019

–

2,319,427

Increase in deposits for purchase of common stock

–

–

710,214

Net cash received in reverse merger

–

852,759

852,759

Principal payments on notes payable

–

(65,900

)

(65,900

)

Net cash provided by financing activities

492,019

1,186,859

5,023,500

Net increase (decrease) in cash

(304,343

)

555,945

319,957

Cash, beginning of the period

624,300

54,224

–

Cash, end of the period

$

319,957

$

610,169

$

319,957

Supplemental disclosures of cash flow information:

Interest paid

$

–

$

12,153

$

12,153

Income taxes paid

$

–

$

700

$

950

Supplemental schedule of non-cash investing and financing activities:

Conversion of notes payable to common stock

$

–

$

188,595

$

666,780

Convertible note issued for accrued expenses

$

–

$

214,669

$

1,660,832

Issuance of warrants associated with convertible notes payable

$

–

$

233,244

$

424,266

Shares issued to satisfy deposits to purchase common stock

$

710,214

$

–

$

710,214

\

See the accompanying
notes to condensed consolidated financial statements.

6

American Sands Energy Corp.

(A Development Stage Company)

Notes to Condensed Consolidated Financial
Statements (Unaudited)

Note 1 - Description of Business and
Nature of Operations

Green River Resources Corp. (an Alberta,
Canada corporation) (“GRC”), formed on December 1, 2004, and its wholly owned subsidiary, Green River Resources, Inc.
(a Utah corporation) (“GRI”), formed on February 16, 2005, were formed for the purpose of extracting oil from oil sands,
oil shale, and other similar types of naturally occurring hydrocarbons in a cost effective and environmentally safe manner. GRC
completed a merger with American Sands Energy Corp. (formerly Millstream Ventures, Inc.) (“ASEC”), a publicly traded
company, on June 3, 2011. The merger was accounted for as a reverse acquisition with GRC treated as the accounting acquirer.

On December 31, 2011, GRC, a wholly owned
non-operating subsidiary of ASEC, was voluntarily dissolved under the Business Corporation Act of the Province of Alberta, Canada.
As a result of the dissolution, ASEC assumed all of the outstanding stock of GRI which was the sole asset of GRC at the time of
dissolution. References to the “Company” refer to GRC and its wholly owned subsidiary, GRI, prior to the reverse merger
on June 3, 2011, and GRC, GRI, and ASEC (the legal parent) subsequent to the reverse merger transaction until December 31, 2011,
and GRI and ASEC after December 31, 2011. The Company has not generated revenues from its principal operations and, in accordance
with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 915, Development
Stage Entities, is considered a development stage company.

The Company has acquired rights to approximately
1,760 acres of prime oil sand deposits in the Sunnyside area of Utah. Prior to January 24, 2012, the Company had licensed proprietary
extraction technology with Bleeding Rock, LLC (“Bleeding Rock”), which had an exclusive license to a bitumen and hydrocarbon
extraction process to separate oil and other hydrocarbons from sand, dirt and other substances. Bleeding Rock is a significant
stockholder of the Company and is 50% owned in combination among the Chief Executive Officer of the Company and two of his relatives.

Effective January 24, 2012, the Company
entered into a License, Development and Engineering Agreement with Universal Oil Recovery Corp. and SRS International (the “License
Agreement”) whereby the Company was granted an exclusive non-transferable license to use certain technology in its proposed
business to extract bitumen from oil sands. The territory covered by the agreement includes the State of Utah and any other geographic
location in which a future designated project is commenced by or through the Company. In conjunction with the License Agreement,
the Company terminated its operating agreement with Bleeding Rock under which Bleeding Rock had licensed rights to use similar
technology to GRI. The License Agreement also designates the Company as an “authorized agent” in representing the owner
of the technology in future projects. The Chief Executive Officer, a director, and principal stockholder of the Company, is an
owner and manager of Bleeding Rock.

The License Agreement requires the licensing
parties to provide demonstration equipment for the process by which their proprietary solvent extracts bitumen from oil sands and
to demonstrate the process on up to 150 tons of oil sands. The term of the License Agreement is for 20 years and thereafter so
long as production of products using the technology is commercially and economically feasible.

Note 2 – Significant Accounting
Policies

These financial statements have been prepared
by the Company in accordance with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information,
as well as the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by US GAAP
for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair presentation of the interim financial statements have been included.

The preparation of financial statements
in conformity with US GAAP requires management to make judgments, estimates, and assumptions that could affect the reported amounts
of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ significantly from those estimates.

7

American Sands Energy Corp.

(A Development Stage Company)

Notes to Condensed Consolidated Financial
Statements (Unaudited)

a) Principles of Consolidation

The condensed
consolidated financial statements include the consolidated operations of GRC through June 3, 2011, the consolidated operations
of GRC and ASEC from June 3, 2011 through the GRC dissolution on December 31, 2011 and the consolidated operations of ASEC and
GRI through September 30, 2012. All significant intercompany balances and transactions have been eliminated
in consolidation.

b) Mineral Leases

In certain cases, the Company capitalizes
costs related to investments in mineral lease interests on a property-by-property basis. Such costs include mineral lease acquisition
costs. Costs are deferred until such time as the extent of proved developed reserves has been determined and mineral lease interests
are either developed, the property sold or the mineral lease rights are allowed to lapse. To date all exploration and lease costs
have been expensed.

c) Research and Development

The Company continues to develop additional
technology related to its licensed proprietary bitumen extraction process. To date, the Company has expensed costs associated with
developing its technology as research and development costs. For the six months ended September 30, 2012 and 2011, the Company
incurred costs of $186,164 and $99,605, respectively, for research and development of the technology involved with developing its
technologies.

d) Stock-based Compensation

The Company uses the Black-Scholes option-pricing
model to determine the fair value of stock options and warrants granted. For employee stock options, the Company records the grant-date
fair value as expense over the period in which it is earned, typically the vesting period. For consultants, the fair value of the
stock-based award is recorded as expense over the term of the service period, and unvested amounts are revalued using the Black-Scholes
model at each reporting period. For warrants issued to lenders, the Company records the grant-date fair value of the warrants and
any resulting beneficial conversion feature for convertible debt, as a note discount. The discount is then amortized over the term
of the convertible debt as non-cash interest expense.

e) Earnings or Loss Per Common Share

Basic earnings or loss per common share
is computed on the basis of the weighted average number of shares outstanding during the periods. Diluted earnings or loss per
common share is calculated on the basis of the weighted average number of common shares outstanding during the period plus the
effect of potential dilutive shares during the period. Potential dilutive shares include outstanding stock options and warrants
and convertible debt instruments. For periods in which a net loss is reported, potential dilutive shares are excluded because they
are antidilutive. Therefore, basic loss per common share is the same as diluted loss per common share for the three and six months
ended September 30, 2012 and 2011.

f) Recent Accounting Pronouncements

In July 2012, the FASB issued Accounting
Standards Update (“ASU”) 2012-02, Intangibles-Goodwill and Other (Topic350): Testing Indefinite-Lived Intangible
Assets for Impairment. This ASU permits an entity the option to first assess qualitative factors to determine whether it is
more-likely-than-not that an indefinite-lived intangible asset is impaired. If the qualitative assessment supports the conclusion
that it is more-likely-than-not that the fair value of the asset exceeds its carrying amount, the entity would not need to perform
the two-step quantitative impairment test. The focus of the guidance is to reduce the cost and complexity of performing impairment
tests for indefinite-lived intangible assets other than goodwill, and to improve consistency in impairment testing among long-lived
asset categories. This ASU is effective for annual and interim impairment tests performed prior to the issuance of the final ASU,
if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company has
not early-adopted this ASU, and this ASU is not expected to have a material impact on the Company’s consolidated financial
statements.

8

American Sands Energy Corp.

(A Development Stage Company)

Notes to Condensed Consolidated Financial
Statements (Unaudited)

In October 2012, the FASB issued ASU 2012-04,
Technical Corrections and Improvements. The amendments in this update cover a wide range of Topics in the ASC. These amendments
include technical corrections and improvements to the ASC and conforming amendments related to fair value measurements. The amendments
in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected
to have a material impact on the Company’s consolidated financial statements.

Note 3 – Going Concern

The Company’s financial statements
have been prepared assuming the Company is a going concern which contemplates the realization of assets and the liquidation of
liabilities in the ordinary course of business. The Company has incurred substantial losses from operations, has negative working
capital, and has negative cash flows from operating activities, which raise substantial doubt about the Company’s ability
to continue as a going concern. The Company sustained a net loss for the six months ended September 30, 2012 of $1,504,099 and
has an accumulated deficit of $10,233,879, as of September 30, 2012. In addition, the Company estimates it will require approximately
$60,000,000 in capital to commence its principal operations.

The Company intends to continue its research
and development efforts, but does not have revenues from which to finance these activities internally. As a result, the Company
intends to seek financing in order to fund its operations.

The Company has been able to meet its short-term
needs primarily through loans from third parties, private placements of equity and debt securities, and deferring certain payment
obligations to related parties. The Company is actively seeking additional private and public placements of equity securities. The
Company plans to continue to obtain financing through the sale of equity or debt securities in order to finance operations until
it can generate positive cash flows from operating activities. The equity private and public placements are expected to
provide the needed funds for continued operations and further research and development of the Company’s proprietary oil sands
refining methods. The Company can provide no assurance that it will be able to obtain sufficient additional financing needed to
develop its technology and alleviate doubt about its ability to continue as a going concern. To the extent the Company raises additional
funds by issuing equity securities the Company’s stockholders may experience significant dilution. Any debt financing, if
available, may involve restrictive covenants that impact the Company’s ability to conduct business. The condensed consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Note 4 – Accrued Expenses

Accrued expenses consist of the following:

September 30,

March 31,

2012

2012

Payroll

$

1,183,805

$

1,172,893

Mineral lease payable

49,557

49,557

Total accrued expenses

$

1,233,362

$

1,222,450

Note 5 – Mineral Leases

During 2005, the Company acquired two oil
sands mineral leases: one covering an undivided 40% interest and the other covering an undivided 20% interest in a 1,120-acre parcel.
Additionally, an undivided 16.666% interest in a 640-acre tract was acquired. These leases are located in Carbon County, Utah,
have a 6-year life, and require minimum yearly lease payments of $151,403, increasing to $224,597 on the fifth anniversary of the
lease date if the properties have not reached commercial production. In January 2012, the lease terms were extended through 2014
and the annual lease payments remained unchanged.

9

American Sands Energy Corp.

(A Development Stage Company)

Notes to Condensed Consolidated Financial
Statements (Unaudited)

In 2009, a fourth lease was entered into
with William G. Gibbs, a relative of the Chief Executive Officer of the Company, for an additional undivided 5% interest in the
640-acre tract (for a total 21.666% undivided interest in the 640-acre tract). This lease is located in Carbon County, Utah, adjacent
to the 1,120-acre tract. This lease has a 6-year life with a minimum yearly lease payment of $7,965 and is scheduled to terminate
by October, 2015 if the property has not reached commercial production.

The Company’s interest in these leases
is conditioned upon the payments of royalties, minimum yearly investment in development, tax payments, and other obligations to
the owners of the leased property.

Upon commencement of operations, each lease
requires a production royalty of 10% of the market value of the minerals sold, net of applicable costs and expenses. The Company
has the right, but not the obligation, to pool or unitize the leases, such that the ore mined is allocated between the leases and
the corresponding royalties are paid on their proportionate interests. If not pooled, the owners will be paid royalties only to
the extent the oil sand ore is mined on their respective property. Through September 30, 2012, no production royalties were accrued
or paid because production on these properties had not commenced. After three consecutive calendar years of production on the 1,120-acre
parcel, the production royalty on the 1,120-acre parcel shall be the greater of the 10% royalty or $1,000,000 annually.

Future minimum lease payments are as follows
for the years ending:

September 30,

2013

$

232,562

2014

232,562

2015

6,638

Total future minimum lease payments

$

471,762

Note 6 – Convertible Notes Payable

As a result of the reverse merger, the
Company assumed convertible notes payable of $770,000 on June 3, 2011. In addition, the Company has issued $745,000 of convertible
notes payable subsequent to the reverse merger, through September 30, 2012. These notes were issued pursuant to a $1,750,000 private
offering. As of September 30, 2012, there was $1,515,000 of convertible notes payable outstanding with accrued interest of $178,889.
This offering was closed by the Company effective January 31, 2012.

The notes bear interest at 10% per annum
and all principal and interest are due and payable by April 30, 2014. The notes and all accrued interest are convertible into the
Company’s common stock at any time by the lender at approximately $0.50 per common share until the due date. The notes automatically
convert upon completion of a financing of $10,000,000 or more.

In connection with the terms of the offering,
holders of the notes also received 100,286 warrants for each $50,000 loaned to the Company. Through September 30, 2012, the Company
granted 3,038,667 warrants in connection with this offering (see Note 9). The Company recorded a debt discount related to the warrants
and resulting beneficial conversion feature of $865,334. The debt discount was $509,631 and $669,351 as of September 30, 2012 and
March 31, 2012, respectively. For the warrants issued, the Company valued the warrant discount using the Black-Scholes pricing
model with the following weighted average assumptions:

Assumptions

Dividend yield

–

Weighted average volatility

158.34%

Risk-free interest rate

0.99%

Expected life (years)

2.79

10

American Sands Energy Corp.

(A Development Stage Company)

Notes to Condensed Consolidated Financial
Statements (Unaudited)

Note 7 – Convertible Note Payable,
Related Party

On May 31, 2011, the Company converted
$214,281 of its outstanding payable to a related party, Bleeding Rock LLC, into a 6% convertible promissory note. The note is convertible
into 535,704 shares of the Company’s common stock. As of September 30, 2012, the carrying balance of the note was $231,752,
including accrued interest of $17,471. In August 2012, the Company extended the due date of the note to April 30, 2014.

Effective January 24, 2012, the Company
entered into a Termination Agreement with Bleeding Rock (the “Termination Agreement”). The purpose of the agreement
was to terminate the Operating Agreement dated May 31, 2005, as amended, between Bleeding Rock and GRI (the “Operating Agreement”).
Pursuant to the Operating Agreement GRI had obtained the rights through Bleeding Rock to utilize a process for the development,
engineering and extraction of hydrocarbons from oil sands. In light of conversations with potential investors, the Company determined
that having the technology licensed directly to the Company (rather than through Bleeding Rock and the Operating Agreement) would
be beneficial to fund raising prospects.

As of the date
of the Termination Agreement, GRI owed $1,446,551 to Bleeding Rock, payable under the terms of the Operating Agreement. In connection
with the termination of the Operating Agreement, GRI issued a 5% convertible promissory note to Bleeding Rock for this amount.
The note initially was due and payable in one year from the date of the note and is convertible into shares of the Company’s
common stock any time before maturity at the rate of one share for each $0.50 of principal or interest converted. In August
2012, the Company extended the due date of the note to April 30, 2014.

As of September 30, 2012, the carrying
balance of the note was $1,496,286, including accrued interest of $49,735. Effective on the date of termination, Bleeding Rock
assigned its interest in the note to Hidden Peak, a related party who is the majority owner of Bleeding Rock.

Note 8 – Common Stock

In March 2012, the Company initiated a
private placement to raise an aggregate maximum of $7,000,000 through the sale of up to 140 units at $50,000 per unit. Each unit
is composed of 43,478 shares of common stock and two-year warrants to purchase another 10,870 shares of common stock at $1.15 per
share. As of September 30, 2012, the Company had sold 1,089,781 shares of common stock under the private placement agreement resulting
in gross proceeds of $1,253,248. As more fully described in Note 9, the Company issued 272,402 warrants in connection with this
private placement.

Note 9 – Warrants

The Company has three classes of warrants
outstanding; namely, bridge warrants, convertible debt warrants, and private placement warrants.

a)

Bridge Warrants

In connection with the issuance
of certain notes payable, the Company granted bridge warrants to the note holders. These bridge warrants give the holder the right
to purchase shares of the Company’s common stock at $0.40 per share. As of September 30, 2012 and March 31, 2012, there were
244,420 bridge warrants issued and outstanding.

b)

Convertible Debt Warrants

In connection with the Company’s
$1,750,000 private convertible note offering (see Note 6), the Company granted warrants to the note holders. These warrants give
the holder the right to purchase shares of the Company’s common stock at approximately $0.50 per share. The warrants expire
on April 30, 2014. As of September 30, 2012 and March 31, 2012, there were 3,038,667 convertible debt warrants outstanding.

11

American Sands Energy Corp.

(A Development Stage Company)

Notes to Condensed Consolidated Financial
Statements (Unaudited)

c)

Private Placement Warrants

In connection with the Company’s
$7,000,000 private placement (see Note 8), the Company granted warrants to the stock purchasers. These warrants give the holder
the right to purchase shares of the Company’s common stock at $1.15 per share for a 2-year period. As of September 30, 2012
and March 31, 2012, there were 272,402 and 158,706 private placement warrants outstanding, respectively.

Note 10 – Stock Option Plan

In April 2011, the Company adopted the
2011 Long-Term Incentive Plan (the “2011 Plan”) which reserves for the issuance of up to 7,000,000 shares of the Company’s
common stock. During the six months ended September 30, 2012, the Company issued 450,000 options to officers and directors of the
Company under the 2011 Plan. The options vest 1/3 immediately and 1/3 on each of the first two anniversary dates, have an exercise
price of $1.15 per share, and expire on June 15, 2017. The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model. The assumptions noted below were used to value the options granted during the six months
ended September 30, 2012.

Assumptions

Dividend yield

–

Weighted average volatility

175.45%

Risk-free interest rate

0.43%

Expected life (years)

5

Expected option lives were based on historical
data of the Company. Expected stock price volatility was based on data from comparable public companies. The risk free interest
rate was calculated using U.S. Treasury constant maturity rates similar to the expected lives of the options, as published by the
Federal Reserve. The Company has no plans to declare any future dividends.

The summary of option activity for the
six months ended September 30, 2012 is presented below:

Number of
Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Life (years)

Balance as of March 31, 2012

3,212,500

$

0.40

5.70

Granted

450,000

1.15

4.33

Exercised

–

–

–

Canceled

–

–

–

Expired

–

–

–

Balance as of September 30, 2012

3,662,500

$

0.49

5.34

The weighted average grant-date fair value
of options granted during the six months ended September 30, 2012 and September 30, 2011 was $1.15 and $0.34, respectively.

12

American Sands Energy Corp.

(A Development Stage Company)

Notes to Condensed Consolidated Financial
Statements (Unaudited)

Outstanding and exercisable options presented
by price range as of September 30, 2012 are as follows:

Options Outstanding

Options Exerciseable

Weighted

Averaged

Weighted

Weighted

Number of

Remaining

Average of

Number of

Average

Exercise

Options

Life

Exercise

Options

Exercise

Price

Outstanding

(Years)

Price

Exercisable

Price

$

0.25

50,000

4.37

$

0.25

12,500

$

0.25

0.40

3,087,500

5.50

0.40

3,087,500

0.40

0.50

75,000

4.00

0.50

18,750

0.50

1.15

450,000

4.58

1.15

150,000

1.15

$0.25-$1.15

3,662,500

5.34

$

0.49

3,268,750

$

0.43

The estimated fair value of the Company’s
stock options, less expected forfeitures, is amortized over the options’ vesting period on the straight-line basis. The Company
recognized the following equity-based compensation expenses during the six months ended September 30, 2012 and 2011.

2012

2011

Stock-based compensation expense

$

219,358

$

584,061

Income tax benefit recognized related to stock-based compensation

–

–

Income tax benefit realized from the exercise and vesting of options

–

–

As of September 30, 2012, there was $313,156
of total unrecognized compensation cost with a weighted average vesting period of approximately 2.25 years.

As of September 30, 2012 and 2011, the
intrinsic value of outstanding and vested stock options was as follows:

2012

2011

Intrinsic value - options outstanding

$

2,409,375

$

321,250

Intrinsic value - options exercisable

2,339,063

321,250

Intrinsic value - options exercised

–

–

Note 11 – Related-Party Transactions

From inception, pursuant to the terms of
the Operating Agreement (see Notes 1 and 7), the Company has entered into transactions with Bleeding Rock. Historically, the Company
has paid Bleeding Rock a fee as required by the Operating Agreement. The Chief Executive Officer of the Company is also the managing
executive of Bleeding Rock.

Effective January 24, 2012, the Company
entered into a Termination Agreement with Bleeding Rock. The purpose of the agreement was to terminate the Operating Agreement
dated May 31, 2005, as amended, between Bleeding Rock and GRI. Pursuant to the Operating Agreement, GRI had obtained the rights
through Bleeding Rock to utilize a process for the development, engineering and extraction of hydrocarbons from oil sands. In light
of conversations with potential investors, the Company determined that having the technology licensed directly to the Company (rather
than through Bleeding Rock and the Operating Agreement) would be beneficial to fund raising prospects.

13

American Sands Energy Corp.

(A Development Stage Company)

Notes to Condensed Consolidated Financial
Statements (Unaudited)

As of the date
of the Termination Agreement, GRI owed $1,446,551 to Bleeding Rock, payable under the terms of the Operating Agreement. In connection
with the termination of the Operating Agreement, GRI issued a 5% convertible promissory note to Bleeding Rock for this amount.
The note is due and payable in one year from the date of the note and is convertible into shares of the Company’s common
stock any time before maturity at the rate of one share for each $0.50 of principal or interest converted. In August 2012, the
due date of the note was extended to April 30, 2014. The Company is not responsible for the repayment of the note issued by GRI
except for issuing stock if the note is converted. As of September 30, 2012, the carrying balance of the note was $1,496,286,
including accrued interest of $49,735. Effective on the date of termination, Bleeding Rock assigned its interest in the note to
Hidden Peak, a related party who is the majority owner of Bleeding Rock.

Contemporaneous with the execution of the
License Agreement and the Termination Agreement described above, the Company entered into a Gross Royalty Agreement with Bleeding
Rock whereby the Company is obligated to pay a royalty equal to 1.5% of the gross receipts from future projects using the technology,
excluding the current project in Sunnyside, Utah. The Gross Royalty Agreement was similarly assigned to Hidden Peak.

On May 31, 2011, the Company converted
$214,281 of the accrued fees to Bleeding Rock into a 6% convertible promissory note. The note is convertible into 535,704 shares
of the Company’s common stock. As of September 30, 2012, the carrying balance of the note was $231,752, including accrued
interest of $17,471. In August 2012, the due date of the note was extended to April 30, 2014.

In 2009, the Company entered into a mineral
lease with William G. Gibbs, a relative of the Chief Executive Officer of the Company, for an additional undivided 5% interest
in the 640-acre tract (for a total 21.666% undivided interest in the 640-acre tract). This lease is located in Carbon County, Utah,
adjacent to the 1,120-acre tract (see Note 5). This lease has a 6-year life with a minimum yearly lease payment of $7,965 and is
scheduled to terminate by October 2015 if the property has not reached commercial production.

Note 12 – Commitments

On April 1, 2012, the Company entered into
a Management and Services Agreement (the “Management Agreement”) with a principal stockholder to provide management
services to the Company (the “Principal Stockholder”). The Principal Stockholder is managed by one of the Company’s
directors and is owned in part by this director and by the Company’s CFO, who is also the chief financial officer of the
Principal Stockholder. The term of the Management Agreement commenced on April 1, 2012 and is effective for 36 months, and automatically
renews for an additional 12 months on each succeeding anniversary unless terminated in writing by either party. In exchange for
the services provided by the Principal Stockholder, the Company agrees to pay a monthly fee to the Principal Stockholder of $25,000.
The monthly fee will accrue until the Company raises a minimum of $3,500,000 in an equity or debt offering (the “Offering”)
and at the time of the closing of the Offering, the Principal Stockholder shall have the option, but not the obligation, to convert
all outstanding amounts accrued into the equity or debt instruments issued by the Company in the Offering.

On October 1, 2011, the Company entered
into an advisory agreement with a company owned and controlled by the President of the Company. The agreement calls for the payment
of $10,000 per month to this company for assistance with the development of the Company’s strategic objectives. The agreement
expires on the earlier to occur of October 31, 2012, or at such time as the President begins to draw a salary under his Employment
Agreement.

The Company’s President and CFO have
been granted stock options to purchase 400,000 and 200,000 shares of common stock, respectively. The exercise price is $1.15 per
share and the options expire on February 16, 2017. The options vest upon the Company achieving certain levels of funding with 50%
vesting upon completion of the Company raising an initial $5 million and the remaining 50% vesting when the Company raises an additional
$40 million. To date, the Company has not accounted for these options due to the inherent uncertainty in the current economic environment
that these milestones will be achieved.

14

American Sands Energy Corp.

(A Development Stage Company)

Notes to Condensed Consolidated Financial
Statements (Unaudited)

Note 13 – Subsequent Event

On October 25, 2012, the Company issued 86,987 shares of common
stock valued at $100,000 ($1.15 per share) to a financial advisory firm that is assisting the Company with raising capital.

15

Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations

The following discussion and analysis
should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section and audited consolidated financial statements and related notes thereto included in our Annual Report
on Form 10-K for the year ended March 31, 2012, and with the unaudited consolidated financial statements and related notes thereto
presented in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

The statements contained herein that are
not historical facts are forward-looking statements that represent management’s beliefs and assumptions based on currently
available information. Forward-looking statements include the information concerning our current and future operations, business
strategies, need for financing, competitive position, ability to retain and recruit personnel, and the effects of competition.
Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking
terminology such as the words “believes,” “intends,” “may,” “should,” “anticipates,”
“expects,” “could,” “plans,” or comparable terminology or by discussions of strategy or trends.
Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances
that these expectations will prove to be correct. Such statements by their nature involve risks and uncertainties that could significantly
affect expected results, and actual future results could differ materially from those described in such forward-looking statements.

Overview

American Sands Energy Corp. (“ASEC”)
is a development stage company that proposes to engage in the extraction of bitumen from oil sands, initially in projects in the
Mountain West region of North America using an extraction and recovery system using a licensed proprietary solvent. Since our inception,
we have been engaged in the business of acquiring and developing oil sand assets and extraction and recovery systems and unique
solvents used to separate the oil contained in oil sands. The Company anticipates that its primary operations will include the
mining of oil sands, the separation of oil from the sands and the sale of oil and oil by-products.

We have obtained a license for a hydrocarbon
extraction process that separates oil and other hydrocarbons from sand, shale, dirt and other substances, without leaving behind
toxins or other contaminants. We are currently developing our first project on certain hydrocarbon and mineral leases which cover
approximately 1,760 acres near Sunnyside, Utah (the “Sunnyside Project”). In accordance with the standards contained
in Rule 4-10(a) of the SEC’s Regulation S-X, these leases contain no proven reserves of oil or gas. However, we have obtained
an independent Resource Audit and Classification report dated May 29, 2009, from a major international geology and mining consulting
firm describing the quantity and quality of the bitumen resource estimated to be located on our leases.

To date, we have acquired extensive bitumen
resources, a working knowledge of the process technology and have initiated applications for mining, environmental and other permits
required to build a commercial plant (the “Commercial Facility”). Additional work to be completed as part of the project
development phase includes:

Final mine planning and civil engineering for the Sunnyside Project;

Acquisition of additional property in areas of interest in order
to block-up properties into logical and economical mining units;

Determination of technical and economic parameters for the commercial
scale use of the process, including engineering; and

Completion of environmental and permitting work for the Commercial
Facility.

Contemporaneously with the pursuit of the
permitting of the project, we will also finalize engineering and equipment for the 5,000 barrel per day plant. We retained a leading
engineering firm in the North American oil sands extraction industry, AMEC BDR Limited, and they have completed an engineering
and feasibility study with respect to a commercial plant that will produce up to 3,000 barrels of oil per day. We also retained
SRS Engineering to demonstrate the technology through a new pilot plant. The pilot test runs were successful, removing in excess
of 99% of the bitumen from the sand and leaving less than the two parts per million of solvent in the sand. This means that the
sand is suitable to be put back into the environment without tailing ponds or other environmental restrictions. Based on additional
findings from the recent pilot tests, we are also proposing to expand the size of the initial Commercial Facility from the 3,000
barrels per day proposed in the AMEC BDR study, to 5,000 barrels per day. We have also retained an environmental engineering and
consulting firm to assist us in preparing and filing the necessary mine and environmental permits to operate an underground mine.
Based on the information from our consultants, we believe that we will require approximately $60,000,000 to procure and install
the necessary equipment to begin operations of a plant that we believe will produce approximately 5,000 barrels per day of bitumen.

16

We have performed lab and pilot plant tests
on oil sands from the Utah Green River Formation to prove the viability of the technology and to understand several key elements
in the process. Initial pilot plant test runs were conducted in 2006-2007. We hired an independent engineering firm, AMEC BDR Limited,
to witness the initial pilot plant tests and to manage the lab work and review the results. In addition to the initial pilot test,
we have run additional pilot tests on a new system designed by SRS Engineering International from July through September of 2012.
In connection with those tests, we ran oil sand ore from Utah and the Congo to acquire additional information on the efficiency
of the solvent in removing the bitumen from the sand, the recovery of solvent from the bitumen and sand, and the overall efficiency
and energy use of the system. The current test results were consistent with the initial results. The results of these tests are
summarized as follows:

Virtually all of the bitumen was separated from the sand, leaving
the sand “oil” free.

The compositional characteristics of the bitumen were not altered
by the process; therefore, the bitumen will be suitable for upgrading and refining to saleable products by conventional refining
technology.

The sand product contained less than 2 ppm of solvent residue and
presents no environmental liability and can be returned to the mine site or sold.

Solvent losses to the bitumen product were also insignificant.
Consequently, because the solvent is recycled with minimal loss in a closed loop system, make-up solvent costs are minimal.

The composition and properties of the solvent recovered by the
process were not altered by the process; therefore, the solvent can be recycled through the process without further conditioning
or processing.

Based on the results of those tests, we
have evaluated the feasibility and costs of scaling the process into a plant that will initially process up to 5,000 barrels per
day, with possible future expansion of facilities of up to 50,000 barrels per day,subject to market conditions and the
availability of financing on terms acceptable to the Company.

Critical Accounting Policies and
Estimates

The selection and application of accounting
policies is an important process that has developed as our business activities have evolved and as the accounting rules have changed.
Accounting rules generally do not involve a selection among alternatives, but involve an implementation and interpretation of existing
rules, and the use of judgment, to the specific set of circumstances existing in our business. Discussed below are the accounting
policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions
involved and the magnitude of the asset, liability, revenue or expense being reported. See Note 2 to our unaudited financial statements
included in this Form 10-Q for a discussion of those policies.

Going Concern - The Company’s
financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization
of assets and the liquidation of liabilities in the ordinary course of business. The Company has incurred substantial losses from
operations resulting in negative working capital (current liabilities exceed current assets), and the Company has negative operating
cash flows. The Company sustained a net loss for the six months ended September 30, 2012 of $1,504,099 and has an accumulated deficit
of $10,233,879, as of September 30, 2012. In addition, the Company estimates it will require approximately $60,000,000 in capital
expenditures to commence principal operations. These matters, among others, raise substantial doubt about the Company’s ability
to continue as a going concern.

Since inception of the development stage,
the Company has not generated any revenue and its financial position is not sufficient to fund its planned business objective for
an extended period of time. The Company is dependent on the sale of equity or debt securities in the next twelve months in order
to obtain the requisite capital to continue to pursue its business objectives. If the Company is not able to obtain additional
capital through the sale of equity or debt securities, it will not be able to commence production.

17

Mineral Leases – Due to the
uncertainty regarding the recoverability of costs to acquire, maintain, and develop mineral leases, to date all costs to acquire,
maintain, and develop mineral leases have been expensed as incurred.

Stock-Based Compensation –
The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options and warrants granted. For
employee stock options, the Company records the grant-date fair value as expense over the period in which it is earned, typically
the vesting period. For consultants, the fair value of the stock-based award is recorded as expense over the term of the service
period, and unvested amounts are revalued using the Black-Scholes model at each reporting period. For warrants issued to lenders,
the Company records the grant-date fair value of the warrants and any resulting beneficial conversion feature for convertible debt,
as a note discount. The discount is then amortized over the estimated life of the warrant as non-cash interest expense.

Results of Operations

Three Months Ended September 30, 2012
compared to Three Months Ended September 30, 2011

During the three months ended September
30, 2012, the Company incurred a net loss of $723,573 compared to a net loss of $538,144 for the three months ended September 30,
2011. During the three months ended September 30, 2012, our operating expenses were $584,394, which represented a 30% increase,
compared to the three months ended September 30, 2011. Selling, general and administrative expenses increased by 43% from $297,446
during the three months ended September 30, 2011 to $424,878 during the three months ended September 30, 2012. Professional fees
increased by 63% from $26,022 for the three months ended September 30, 2011 to $42,384 for the three months ended September 30,
2012. In addition, the Company incurred $108,703, $21,000, and $12,194 during the three months ended September 30, 2012 for management
services, investor relations, and website expenses, respectively compared to $75,000, $0, and $850, respectively for similar costs
during the three months ended September 30, 2011. Costs for stock-based compensation increased from $0 for the three months ended
September 30, 2011 to $43,227 for the three months ended September 30, 2012. The stock-based compensation costs incurred during
the three months ended September 30, 2012 resulted from the amortization of expense associated with the issuance of stock options
that occurred during the past twelve months. Going forward, we believe that the obligations placed upon us as a result of our reporting
requirements under SEC rules and regulations will result in our operating expenses increasing.

During the three months ended September
30, 2012, the Company incurred $106,255 of research and development costs associated primarily with engineering and related costs
incurred to obtain the necessary licenses and permits for the Company to develop its mining assets. In addition, the Company incurred
costs to develop a pilot test unit to further develop and prove the viability of the Company’s proprietary technology to
separate the bitumen from the sand. Similar costs for the three months ended September 30, 2011 totaled $99,605.

Interest expense increased to $139,179
for the three months ended September 30, 2012 as compared to $88,423 for the three months ended September 30, 2011. The increase
in interest expense is due to the Company having increased debt as a result of the convertible notes payable issued during the
fiscal year ended March 31, 2012 (“Fiscal 2012”), coupled with higher non-cash interest expense as a result of amortization
of warrants issued in connection with the convertible notes payable. The Company also converted certain obligations to related
parties to notes payable resulting in additional interest expense.

18

Six Months Ended September 30, 2012
compared to Six Months Ended September 30, 2011

During the six months ended September 30,
2012, the Company incurred a net loss of $1,504,099 compared to a net loss of $1,369,011 for the six months ended September 30,
2011. During the six months ended September 30, 2012, our operating expenses were $1,225,712, which represented a 3% decrease,
compared to operating expenses of $1,265,025 for the six months ended September 30, 2011. Current year operating expenses included
research and development costs of $186,164 for the six months ended September 30, 2012 compared to $99,605 for the six months ended
September 30, 2011. These costs related to the Company developing its technology and mining plans. Selling, general and administrative
expenses decreased to $933,026 for the six months ended September 30, 2012 from $1,138,084 for the six months ended September 30,
2011. During the six months ended September 30, 2011, the Company recorded selling, general and administrative expenses of $584,061
in non-cash expense from the issuance of 3,087,500 fully vested stock options to officers and directors of the Company shortly
after the completion of the reverse merger transaction. During the six months ended September 30, 2012, the Company incurred $219,358
of costs associated with stock options issued subsequent to the reverse merger to officers, directors and third party consultants.
The decrease in expense associated with stock-based compensation during the current period was partially offset by an increase
in professional fees which increased by $58,216 or 101% from $57,495 for the six months ended September 30, 2011 to $115,711 for
the six months ended September 30, 2012. In addition, management fees, investor relations fees, and website fees increased during
the six months ended September 30, 2012 to $236,470 from $150,850 for the six months ended September 30, 2011. Going forward, we
believe that the obligations placed upon us as a result of our reporting requirements under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”) will continue to result in our operating expenses increasing.

Interest expense increased to $278,387
for the six months ended September 30, 2012 as compared to $104,846 for the six months ended September 30, 2011. The increase in
interest expense is due to the Company having increased debt as a result of the convertible notes payable issued during Fiscal
2012 coupled with higher non-cash interest expense as a result of amortization of warrants issued in connection with the convertible
notes payable.

Liquidity and Capital Resources

As of September 30, 2012, the Company had
$319,957 in cash, negative working capital of $981,193 and total liabilities of $4,373,862. As of September 30, 2012, the Company’s
total assets were $458,064 consisting of cash, prepaid and other current assets, and property and equipment.

The Company has established a resource
position, a working knowledge of the process technology and an initial list of environmental and other permits required to build
a commercial plant. Additional work to be completed as part of the project development phase includes:

1.

Final mine planning and civil engineering for the Sunnyside Project.

2.

Acquisition of additional property in areas of interest in order to block-up properties into logical
and economical mining units.

3.

Determination of technical and economic parameters for the commercial scale use of the process,
including engineering.

4.

Preparation of environmental impact statements and receipt of federal and state regulatory agency
approval for the commercial facility.

5.

Completion of environmental and permitting work for the commercial facility.

The Company believes that with the $1,515,000
of proceeds from the sale of convertible notes payable received through March 31, 2012, together with the $1,202,233 from its private
placement of stock and the balance of the remaining proceeds the Company expects to raise from its private placement of stock,
we will be in a position to initiate items 1 through 5 above. Additional financing of approximately $60,000,000 will be required
to procure and install the necessary equipment to begin operations of a plant that we believe will produce approximately 5,000
barrels per day of bitumen.

Management anticipates that we will be
dependent, for the near future, on additional capital to fund operating expenses and anticipated growth. The report of the Company’s
independent registered public accounting firm for the year ended March 31, 2012, expressed substantial doubt about the Company’s
ability to continue as a going concern. The Company’s operating losses have been funded through the issuance of equity securities
and borrowings. We will need additional funding in the future in order to continue our business operations. While we continually
look for additional financing sources, in the current economic environment, the procurement of outside funding is extremely difficult
and there can be no assurance that such financing will be available, or, if available, that such financing will be at a price that
will be acceptable to us. Failure to generate sufficient revenue or raise additional capital would have an adverse impact on our
ability to achieve our longer-term business objectives, and would adversely affect our ability to continue operating as a going
concern.

19

Off-Balance Sheet Arrangements

During the three months ended September
30, 2012, we did not engage in any off-balance sheet transactions.

Item 3. Quantitative and Qualitative
Disclosures About Market Risk

As a smaller reporting company, we have
elected not to provide the disclosures required by this item.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation
of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rule 13a-15(e) of the Exchange Act as of the end of the period covered by this report. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of
the period covered by this report were effective in ensuring that information required to be disclosed by us in reports that we
file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate
to allow timely decisions regarding required disclosure.

Changes in Internal Control over
Financial Reporting

There were no changes in our internal control
over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the three months ended September
30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

It should be noted that any system of controls,
however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system will
be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls
will succeed in achieving their stated goals under all potential future conditions.

20

PART II. OTHER INFORMATION

Item 1A. Risk Factors

Investing in the Company involves a
high degree of risk. You should carefully consider the following factors. If any of the following risks actually occurs, our business,
financial condition or operating results may suffer, the trading price of our common stock could decline, and you may lose all
or part of your investment.

Risks Related to Our Company and
Its Business

Because of our historic losses from
operations since inception, there is substantial doubt about our ability to continue as a going concern.

In its report dated June 21, 2012, our
independent registered public accounting firm stated that our financial statements for the year ended March 31, 2012, were prepared
assuming that we would continue as a going concern. We have incurred recurring loses since the date of inception that have resulted
in an accumulated deficit attributable to common stockholders of approximately $10,233,879 as of September 30, 2012. Although we
had approximately $319,957 of available cash at September 30, 2012, that amount is not adequate to meet our capital expenditure
and operating requirements over the next 12 months. In addition, we estimate that we will require approximately $60,000,000 for
capital expenditures and working capital to place our properties into production. We currently have no source for these funds.
These factors raise substantial doubt about the ability of the Company to continue as a going concern or to commence principal
operations. We are dependent upon obtaining funds from investors to meet our cash flow requirements. If we are unsuccessful in
doing so, we would be required to substantially revise our business plan or our proposed business could fail.

The impact of disruptions in the global
financial and capital markets may significantly affect our ability to obtain financing.

The market events and conditions that transpired
in 2008 and 2009, including disruptions in the international credit markets and other financial systems, and the continued deterioration
of global economic conditions, have, among other things, caused significant volatility in commodity prices. These events and conditions
caused a loss of confidence in the broader U.S. and global credit and financial markets and resulted in the collapse of, and government
intervention in, numerous major banks, financial institutions and insurers, and created a climate of greater volatility, less liquidity,
widening of credit spreads, a lack of price transparency, increased credit losses and tighter credit conditions. Notwithstanding
various actions by governments, concerns about the general condition of the capital markets, financial instruments, banks, investment
banks, insurers and other financial institutions caused the broader credit markets to further deteriorate and stock markets to
decline substantially. These factors have negatively impacted enterprise valuations and have impacted the performance of the global
economy. Although credit markets, equity markets, commodity markets and the United States and global economies have somewhat stabilized
(and in some instances experienced recoveries), some prominent government officials, economists and market commentators have expressed
concerns regarding the durability or speed of the recovery over the near and medium term, particularly as the fiscal stimulus that
was utilized by the world's governments to combat the global financial crises is withdrawn over time in the coming months and years.

Although we expect to meet our near term
liquidity needs with our working capital on hand, we will continue to need further funding to achieve our business objectives.
In the past, the issuance of equity or debt securities has been the major source of capital and liquidity for us. The recent conditions
in the global financial and capital markets have limited the availability of this funding. If the disruptions in the global financial
and capital markets continue, debt or equity financing may not be available to us on acceptable terms, if at all. If we are unable
to fund future operations by way of financing, including public or private offerings of equity or debt securities, our business,
financial condition and results of operations will be adversely impacted. Additionally, these factors, as well as other related
factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses.

21

Our company has not commenced principal
operations and has a limited operating history and therefore we cannot ensure the long-term successful operation of our business
or the execution of our business plan.

We have not commenced principal mining
operations although GRI, our wholly owned subsidiary, has been developing our current business plan since 2005. As a result, we
have a limited operating history upon which to evaluate our proposed business and prospects. Our proposed business operations will
be subject to numerous risks, uncertainties, expenses and difficulties associated with early stage enterprises. Such risks include
but are not limited to the following:

·

the absence of a lengthy operating history;

·

insufficient capital to fully realize our operating plan;

·

our ability to purchase or lease necessary equipment when required and at reasonable prices;

a competitive environment characterized by well-established and well-capitalized competitors;

·

the ability to identify, attract and retain qualified personnel; and

·

reliance on key personnel.

Because we are subject to these risks,
evaluating our business may be difficult. We may be unable to successfully overcome these risks which could harm our business.
Our business strategy may be unsuccessful and we may be unable to address the risks we face in a cost-effective manner, if at all.
If we are unable to successfully address these risks our business will be harmed.

The exploration for and development
of oil sands properties are highly competitive.

Oil sands exploration and development involves
many risks that even a combination of experience, knowledge and careful evaluation may not be able to overcome. We have no proven
or probable reserves of oil sands on our properties. As with any petroleum property, there can be no assurance that commercial
deposits of bitumen will be produced from our leased lands in Utah.

Furthermore, the marketability of any resource
will be affected by numerous factors beyond our control. These factors include, but are not limited to, market fluctuations of
prices, proximity and capacity of processing equipment, equipment and labor availability and government regulations (including,
without limitation, regulations relating to prices, taxes, royalties, land tenure, allowable production, importing and exporting
of oil and gas, land use and environmental protection). The extent of these factors cannot be accurately predicted, but the combination
of these factors may result in us not receiving an adequate return on invested capital.

If we are unable to hire and retain
key personnel, we may not be able to implement our plan of operation and our business may fail.

Our success is largely dependent on our
ability to continue to hire and retain highly qualified personnel in both management and operations. These individuals may be in
high demand and we may not be able to attract the management staff we need. In addition, we may not be able to afford the high
salaries and fees demanded by qualified personnel, including fees associated with persons employed by us, or we may fail to retain
such employees after they are hired. Our failure to hire and retain key personnel as needed will have a significant negative effect
on our business.

22

We are dependent
upon a few key people and the loss of current management would make it difficult for us to implement our current
business plan.

Investors must rely upon the ability, expertise,
judgment, discretion, integrity and good faith of our management and directors. Our Company’s success is dependent upon its
management and key personnel. We do not maintain key-man insurance for any of our employees. The unexpected loss or departure of
any of our key officers and employees, could be detrimental to our future success.

Compliance with government regulations
and delays in obtaining necessary mining permits and licenses could delay or otherwise adversely affect our proposed business operations.

Our proposed plan to mine and process oil
sands is subject to substantial regulation under federal, state and local laws relating to the exploration for, and the development,
upgrading, marketing, pricing, taxation, and transportation of oil sands bitumen and related products and other matters. Amendments
to current laws and regulations governing operations and activities of oil sands exploration and development operations could have
a material adverse impact on our business. In addition, there can be no assurance that income tax laws, royalty regulations, environmental
regulations and government incentive programs related to our permits and oil sands exploration licenses, and the oil sands industry
generally, will not be changed in a manner which may adversely affect our progress and cause delays, or cause the inability to
explore and develop, resulting in the abandonment of these interests.

Permits, licenses and approvals are required
from a variety of regulatory authorities at various stages of exploration and development. There can be no assurance that the various
government permits, leases, licenses and approvals sought will be granted in respect of our activities, that they will be granted
in a timely manner, or, if granted, that they will not be cancelled or will be renewed upon expiry. There is no assurance that
such permits, leases, licenses and approvals will not contain terms and provisions which may adversely affect our exploration and
development activities.

Environmental and regulatory compliance
may impose substantial costs on us.

Our proposed operations will be subject
to stringent federal, state, and local laws and regulations relating to improving or maintaining environmental quality. Environmental
laws often require parties to pay for remedial action or to pay damages regardless of fault. Environmental laws also often impose
liability with respect to divested or terminated operations, even if the operations were terminated or divested many years ago.

Our exploration activities are or will
be subject to extensive laws and regulations governing prospecting, development, production, exports, taxes, labor standards, occupational
health, waste disposal, land use, protection and remediation of the environment, protection of endangered and protected species,
operational safety, toxic substances and other matters. Exploration is also subject to risks and liabilities associated with pollution
of the environment and disposal of waste products. Compliance with these laws and regulations will impose substantial costs on
us and will subject us to significant potential liabilities. In addition, should there be changes to existing laws or regulations,
our competitive position within the oil sands industry may be adversely affected, as many industry players have greater resources
than we do.

We are required to obtain and are in various
stages of obtaining necessary regulatory permits and approvals in order to explore and develop our properties. The absence of a
distinct overlying shale formation on portions of our leases may make it more difficult or costly to obtain regulatory approvals.
There is no assurance that regulatory approvals for exploration and development of our properties will be obtained at all or with
terms and conditions acceptable to us.

We could encounter third-party liability
or environmental liability in connection with our proposed operations.

Our proposed operations could result in
liability for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs
and other environmental damage. We could be liable for environmental damages caused by previous owners. As a result, substantial
liabilities to third parties or governmental entities may be incurred, and the payment of such liabilities could have a material
adverse effect on our financial condition and results of operations. The release of harmful substances in the environment or other
environmental damages caused by our activities could result in us losing our operating and environmental permits or inhibit us
from obtaining new permits or renewing existing permits. We currently have a limited amount of insurance and, at such time as we
commence additional operations, we expect to be able to obtain and maintain additional insurance coverage for our operations, including
limited coverage for sudden environmental damages, but we do not believe that insurance coverage for environmental damage that
occurs over time is available at a reasonable cost. Moreover, we do not believe that insurance coverage for the full potential
liability that could be caused by environmental damage is available at a reasonable cost. Accordingly, we may be subject to liability
or may lose substantial portions of our properties in the event of certain environmental damage. The Company could incur substantial
costs to comply with environmental laws and regulations which could affect our ability to operate as planned.

23

The early stage of our bitumen extraction
technology increases the risk that we may not be able to successfully implement an oil sands recovery program using this technology.

We have entered into a license agreement
under which the licensing entities have agreed to provide technical and engineering assistance in building an oil sands recovery
plant based upon their proprietary solvent. This solvent process has not been installed on a project which meets the projected
recovery amounts in our business plan. In addition the licensors have only recently created a prototype which demonstrates the
use of the process. There is a risk that the recovery process and plant will not be completed on time or on budget or at all. Additionally,
there is a risk that the program may have delays, interruption of operations or increased costs due to many factors, including,
without limitation: breakdown or failure of equipment or processes; construction performance falling below expected levels of output
or efficiency; design errors; challenges to, or inability to access in a timely or economic fashion; contractor or operator errors;
non-performance by third-party contractors; labor disputes, disruptions or declines in productivity; increases in materials or
labor costs; inability to attract sufficient numbers of workers; delays in obtaining, or conditions imposed by, regulatory approvals;
changes in program scope; violation of permit requirements; disruption in the supply of energy; transportation accidents, disruption
or delays in availability of transportation services or adverse weather conditions affecting transportation; unforeseen site surface
or subsurface conditions; and catastrophic events such as fires, earthquakes, storms or explosions. There is also a risk that the
manufacturer of the recovery plant used to implement our bitumen extraction process could fail in production due to labor shortages,
price increases, and better opportunities with other customers.

We have significant financial obligations
upon the occurrence of certain triggering events.

Our interest in certain mining leases is
conditioned upon the payments of royalties, minimum yearly investment in development, tax payments, and other obligations to the
owners of the leases. If we are unable to make the required payments or meet the necessary obligations, we could default on our
lease agreements which could be terminated and which would void our interest in the leases. There is no certainty we will be able
to make every payment and meet all obligations required under the respective lease agreements.

If we do not reach production levels
by December 31, 2014, our leases may be terminated.

Three of our four leases are conditioned
upon reaching the production stage by December 31, 2014 and the fourth lease requires production by October 2015. If we do not
attain average productivity of at least 500 barrels per day by these dates, our interest in the leases may be terminated. The ability
to attain productivity is conditioned upon factors of which we are not within complete control such as those listed in this Annual
Report. There is no certainty we will ever reach the level of production required to keep our interest in these mining leases from
becoming void.

We have no proven or probable reserves
or resources.

We have not yet established any reserves.
There are numerous uncertainties inherent in estimating quantities of bitumen resources and reserves, including many factors beyond
our control, and no assurance can be given that the recovery of bitumen will be realized. In general, estimates of resources and
reserves are based upon a number of factors and assumptions made as of the date on which the resources and reserves estimates were
determined, such as geological and engineering estimates which have inherent uncertainties, the assumed effects of regulation by
governmental agencies and estimates of future commodity prices and operating costs, all of which may vary considerably from estimated
results. All such estimates are, to some degree, uncertain and classifications of resources and reserves are only attempts to define
the degree of uncertainty involved. For these reasons, estimates of reserves and resources, the classification of such resources
and reserves based on risk of recovery, prepared by different engineers or by the same engineers at different times, may vary substantially.

24

However, we have obtained an independent
Resource Audit and Classification report from a major international geology and mining consulting firm describing the quantity
and quality of the bitumen resource estimated to be located on our leases as of May 29, 2009. The Resource Audit and Classification
was completed in accordance with the provisions of the National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities
(NI 51-101). Such evaluation of our estimates of resources under NI 51-101 was carried out in accordance with the standards set
out in the Canadian Oil and Gas Evaluation (COGE) Handbook, prepared jointly by the Society of Petroleum Evaluation Engineers and
the Canadian Institute of Mining, Metallurgy & Petroleum. Those standards require that the evaluator plan and perform an evaluation
to obtain reasonable assurance as to whether the reserves are free of material misstatement. An evaluation must also include an
assessment as to whether the reserves data are in accordance with the principles and definitions presented in the COGE Handbook.
The estimate provided in this report is classified as contingent resources according to the guidelines set forth in NI 51-101 and
COGE. The project resource calculation is contingent upon completion of additional exploration drilling, processing and extraction
analysis, detailed economic analysis, evolution of legal mining rights, and environmental evaluations. There is no certainty that
the project will be commercially viable to produce any portion of the resource. As a result of the differences between the U.S.
rules and Canadian standards governing disclosure of reserve or resource estimates, differing estimates of reserves or resources
available under our leases are reported, and may in the future be reported, between our website and our periodic reports filed
with the SEC.

Investors are cautioned not to assume that
all or any part of a resource is economically or legally extractable.

We may participate in joint ventures
and/or strategic alliances to develop and operate our planned business. These partnerships or the failure to establish them could
have a material adverse effect on our ability to develop and manage our business. In addition, such undertakings may not be successful.

Our strategy may include plans to participate
in joint ventures and other strategic alliances to develop and operate our business and sell our products. We may develop mining
operations in part through joint ventures and strategic alliances with other parties as well as with additional outside funding.
Joint ventures and strategic alliances may expose us to new operational, regulatory and market risks, as well as risks associated
with additional capital requirements. Additionally, we may not be able to identify and secure suitable alliance partners. Even
if we identify suitable partners, we may be unable to consummate alliances on terms commercially acceptable to us. If we fail to
identify appropriate partners, we may not be able to implement our strategies effectively or efficiently.

In addition to joint venture and strategic
alliances, we may raise additional debt and/or equity financing to build and operate our proposed operations. Such capital raises
could result in significant dilution to the percentage ownership held by existing stockholders or the failure to secure such capital
could impair our ability to execute our business plan.

We anticipate that the cost to build operations
on our existing or future properties will be at least $60,000,000 and we have no current sources for this funding. We have received
indications of interest in future financings but have no firm commitments for any funds. The net proceeds of future offerings are
expected to be used to begin and continue initial operations, including the construction of the recovery facility, and fund operations
for the next twenty-four months. Offerings using our equity securities or debt instruments convertible into our common stock could
require the issuance of a substantial number of additional shares of common stock. These potential offerings and the issuance of
additional shares of common stock would have the effect of diluting the percentage ownership of existing stockholders. Moreover,
there can be no assurance that such financing will be available, or, if available, that such financing will be at a price that
will be acceptable or favorable to us. Failure to generate sufficient revenue or raise additional capital would have an adverse
impact on our ability to achieve our longer-term business objectives, and would adversely affect our ability to continue operating
as a going concern.

25

We do not insure against all potential
operating risks. We may incur losses and be subject to liability claims as a result of our operations.

We maintain insurance for some, but not
all, of the potential risks and liabilities associated with our business. For some risks, we may not obtain insurance if we believe
the cost of available insurance is excessive relative to the risks presented. As a result of market conditions, premiums and deductibles
for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available
only for reduced amounts of coverage. As a result, we may not be able to renew our existing insurance policies or procure other
desirable insurance on commercially reasonable terms, if at all. Although we maintain insurance at levels we believe are appropriate
and consistent with industry practice, we are not fully insured against all risks. In addition, pollution and environmental risks
generally are not fully insurable. Losses and liabilities from uninsured and underinsured events and delay in the payment of insurance
proceeds could have a material adverse effect on our financial condition, results of operations and cash flows.

If we fail to maintain effective internal
control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, the price of our common shares
may be affected.

We are required to maintain effective internal
control over financial reporting under the Sarbanes-Oxley Act of 2002 and related regulations. Any material weakness in our internal
control over financial reporting that needs to be addressed, disclosure of management’s assessment of our internal control
over financial reporting, or management’s report on internal control over financial reporting that discloses a material weakness
in our internal control over financial reporting may reduce the price of our common shares.

Environmental legislation regulating carbon
fuel standards in the United States could result in increased costs and/or reduced revenue. For example, both California and the
federal governments have passed legislation which, in some circumstances, considers the lifecycle greenhouse gas emissions of purchased
fuel and which may negatively affect our business, or require the purchase of emissions credits, which may not be economically
feasible.

Oil and gas mining operations are subject
to applicable law and government regulation. Even if we discover oil and gas deposits in a commercially exploitable quantity, these
laws and regulations could restrict or prohibit the exploitation of those deposits. If we cannot exploit any deposits that we might
discover on our properties, our business may fail.

Both oil and gas exploration and extraction
in the United States requires permits from various federal, state, provincial and local governmental authorities and are governed
by laws and regulations, including those with respect to prospecting, mine development, oil and gas production, transport, export,
taxation, labor standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety
and other matters. There can be no assurance that we will be able to obtain or maintain any of the permits required for the continued
exploration of oil and gas mining properties or for the construction and operation of a mine on our properties at economically
viable costs. If we cannot accomplish these objectives, our business could fail.

We are currently in compliance with all
material laws and regulations that currently apply to our proposed business activities, but have not yet obtained the necessary
permits and licenses to commence principal operations. If we are unable to continue to remain in compliance, or obtain these necessary
permits and licenses, our business could fail. Current laws and regulations are being amended and we might not be able to comply
with them. Further, there can be no assurance that we will be able to obtain or maintain all permits necessary for our future operations,
or that we will be able to obtain them on reasonable terms. To the extent such approvals are required and are not obtained, we
may be delayed or prohibited from proceeding with planned exploration or development of our mining properties.

26

Our mining production and delivery operations
are subject to conditions and events that are beyond our control, which could result in higher operating costs and decreased production
levels.

Our mining operations are planned to be
conducted primarily in underground mines and possibly in surface mines. The level of our production is subject to operating conditions
or events beyond our control that could disrupt operations, decrease production and affect the cost of mining at particular mines
for varying lengths of time. Adverse operating conditions and events that oil and gas producers have experienced in the past include:

·

unfavorable geologic conditions, such as the thickness of the oil and gas deposits and the amount
of rock embedded in or overlying the oil and gas deposit;

·

poor mining conditions resulting from geological conditions or the effects of prior mining;

·

inability to acquire or maintain, or unexpected delays or difficulties in obtaining, necessary
permits or mining or surface rights;

·

changes in governmental regulation of the mining industry or the utility industry;

·

market conditions could change and mean the sale of the type of oil and gas being produced from
our concessions is no longer saleable at an economic price;

accidents, including fire and explosions from methane and other sources;

·

surface subsidence from underground mining, which could result in collapsed roofs at our underground
mines, among other difficulties;

·

unavailability of mining equipment and supplies and increases in the price of mining equipment
and supplies;

·

unexpected maintenance problems or key equipment failures; and

·

increased or unexpected reclamation costs.

If any of these or similar conditions or
events occur in the future at any of the mines we plan to develop or affect deliveries of our product to customers, they may increase
our costs of mining and delay or halt production at particular mines or sales to our customers, either permanently or for varying
lengths of time, which could adversely affect our results of operations, cash flows and financial condition. Our current insurance
coverage would cover some but not all of these risks.

A substantial or extended decline in
oil and gas prices could reduce our revenues and the value of our oil and gas resources.

Our results of future operations will be
dependent upon the prices we receive for our oil and gas and other products as well as our ability to improve productivity and
control costs. Declines in prices could adversely affect our results of operations. The prices charged for oil and gas depend upon
factors beyond our control, including:

·

the supply of, and demand for, domestic and foreign oil and gas;

·

the price elasticity of supply;

·

the demand for oil and gas;

·

the proximity to and the capacity and cost of transportation facilities;

·

governmental regulations and taxes;

·

air emission standards for oil refineries;

·

regulatory, legislative, administrative and judicial decisions;

·

the price and availability of alternative fuels, including the effects of technological developments;
and

·

the effect of worldwide energy conservation measures.

Decreased demand for oil and gas could
result in declines in oil and gas prices and require us to increase productivity and lower costs in order to maintain our margins.
If we are not able to maintain our margins, our operating results could be adversely affected. Therefore, price declines may adversely
affect our operating results for future periods and our ability to generate cash flows necessary to improve productivity and invest
in operations.

27

A decrease in the availability or increase
in costs of labor, key supplies, capital equipment or commodities could reduce any profitability we may achieve.

We will require access to contract miners
at commercially acceptable rates. We currently have no contracts or arrangements for necessary mining personnel. Our proposed mining
operations will also require a reliable supply of steel-related products (including roof control for our underground mines), replacement
parts, belting products and lubricants, none of which have been secured by definitive agreements or contracts. If the cost of any
of these or other supplies increases significantly, or if a source for such mining equipment or supplies are unavailable to meet
our replacement demands, our profitability could be adversely affected. In addition, industry-wide demand growth has recently exceeded
supply growth for certain underground, surface, and other capital equipment. As a result, lead times for some items have increased
significantly. Significant delays in obtaining required parts and equipment could cause our profitability to be reduced from our
current expectations.

The design, development and construction
of our bitumen extraction technology program and any subsequent pilot and commercial projects will require experienced executive
and management personnel and operational employees and contractors with expertise in a wide range of areas. No assurance can be
given that all of the required personnel and contractors with the necessary expertise will be available. Should other oil sands
projects or expansions proceed in the same time frame as our programs and projects, we will have to compete with these other projects
and expansions for qualified personnel and such competition may result in increases to compensation paid to such personnel or in
a lack of qualified personnel. Any inability of our Company to attract and retain qualified personnel may delay or interrupt the
design, development and construction of, and commencement of operations and any subsequent pilot and commercial projects. Sustained
delays or interruptions could have a material adverse effect on the financial condition of our Company.

Inaccuracies in our estimates of oil
sands deposits could result in lower than expected revenues and higher than expected costs.

We will base our oil sands deposit information
on engineering, economic and geological data assembled and analyzed by our in house and contract workers, which will include various
engineers and geologists. The estimates of oil sands deposits as to both quantity and quality will be continually updated to reflect
the production of bitumen from the deposits and new drilling or other data received. There are numerous uncertainties inherent
in estimating quantities and qualities of oil sands deposits and costs to process these deposits, including many factors beyond
our control. Estimates of economically recoverable bitumen and net cash flows necessarily depend upon a number of variable factors
and assumptions, all of which may vary considerably from actual results, such as:

·

geological and mining conditions and/or effects from prior mining activities that may not be fully
identified by available exploration data or that may differ from experience, in current operations;

·

the assumed effects of regulation, including the issuance of required permits, and taxes by governmental
agencies and assumptions concerning oil and gas prices, operating costs, mining technology improvements, severance and excise tax,
development costs and reclamation costs;

·

historical production from the area compared with production from other similar producing areas;
and

For these reasons, estimates of the economically
recoverable quantities and qualities attributable to any particular group of properties, classifications of reserves and non-reserve
deposits based on risk of recovery and estimates of net cash flows expected from particular reserves prepared by different engineers
or by the same engineers at different times may vary substantially and vary materially from estimates. As a result, these estimates
may not accurately reflect actual reserves or non-reserve deposits. Any inaccuracy in our estimates related to our deposits could
result in lower than expected revenues, higher than expected costs and decreased profitability.

28

We compete with numerous alternative
and “green” energy industries.

The U.S. and international petroleum industry
is highly competitive in all aspects, including the exploration for, and the development of, new sources of supply, the acquisition
of oil interests and the distribution and marketing of petroleum products.

The petroleum industry also competes with
other industries in supplying energy, fuel and related products to consumers. Some of these industries benefit from lighter regulation,
lower taxes and subsidies. In addition, certain of these industries are less capital intensive.

A number of competing companies are engaged
in the oil sands business and are actively exploring for and delineating their resource bases. Some of our competitors have announced
plans to begin production of synthetic crude oil, or to expand existing operations. If these plans are effected, they could materially
increase the supply of synthetic crude oil and other competing crude oil products in the marketplace and adversely affect plans
for development of our lands.

We may be subject to unexpected operational
hazards based upon the remote location of our properties.

Our exploration and development activities
are subject to the customary hazards of operation in remote areas, such as fires, explosions, migration of harmful substances,
and spills. A casualty occurrence might result in the loss of equipment or life, as well as injury, property damage or other liability.
While we maintain limited insurance to cover current operations, our property and liability insurance may not be sufficient to
cover any such casualty occurrences or disruptions. Equipment failures could result in damage to our facilities and liability to
third parties against which we may not be able to fully insure or may elect not to insure because of high premium costs or for
other reasons. Our operations could be interrupted by natural disasters such as forest fires or other events beyond our control.
Losses and liabilities arising from uninsured or under-insured events could have a material adverse effect on our business, our
financial condition and results of our operations.

Risks Related to Our Common Stock

Because our shares are designated as
“penny stock”, broker-dealers will be less likely to trade in our stock due to, among other items, the requirements
for broker-dealers to disclose to investors the risks inherent in penny stocks and to make a determination that the investment
is suitable for the purchaser.

Our shares are designated as “penny
stock” as defined in Rule 3a51-1 promulgated under the Exchange Act and thus may be more illiquid than shares not designated
as penny stock. The SEC has adopted rules which regulate broker-dealer practices in connection with transactions in “penny
stocks.” Penny stocks are defined generally as: non-Nasdaq equity securities with a price of less than $5.00 per share; not
traded on a “recognized” national exchange; or in issuers with net tangible assets less than $2,000,000, if the issuer
has been in continuous operation for at least three years, or $10,000,000, if in continuous operation for less than three years,
or with average revenues of less than $6,000,000 for the last three years. The penny stock rules require a broker-dealer to deliver
a standardized risk disclosure document prepared by the SEC, to provide the customer with current bid and offer quotations for
the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing
the market value of each penny stock held in the customer’s account, to make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a stock
that is subject to the penny stock rules. Since our securities are subject to the penny stock rules, investors in the shares may
find it more difficult to sell their shares. Many brokers have decided not to trade in penny stocks because of the requirements
of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited.
The reduction in the number of available market makers and other broker-dealers willing to trade in penny stocks may limit the
ability of shareholders to sell their stock in any secondary market. These penny stock regulations, and the restrictions imposed
on the resale of penny stocks by these regulations, could adversely affect our stock price.

29

Future sales of our common stock may
cause our stock price to decline

Our stock price may decline due to future
sales of our shares or the perception that such sales may occur. The Board of Directors of the Company has discretion to determine
the issue price and the terms of issue of shares of our common stock. Such future issuances may be dilutive to investors. Holders
of shares of common stock have no pre-emptive rights under our Certificate of Incorporation to participate in any future offerings
of securities.

If we issue additional shares of common
stock in private financings under an exemption from the registration requirements, then those shares will constitute “restricted
shares” as defined in Rule 144 under the Securities Act of 1933 (the “1933 Act”). The restricted shares may only
be sold if they are registered under the 1933 Act, or sold under Rule 144, or another exemption from registration under the 1933
Act.

Some of our outstanding restricted shares
of common stock are either eligible for sale pursuant to Rule 144 or have been registered under the 1933 Act for resale by the
holders. We are unable to estimate the amount, timing, or nature of future sales of outstanding common stock. Sales of substantial
amounts of our common stock in the public market may cause the stock’s market price to decline.

The public trading market for our common
stock is volatile and may result in higher spreads in stock prices.

Our common stock trades in the over-the-counter
market and is quoted on the OTC Markets. The over-the-counter market for securities has historically experienced extreme price
and volume fluctuations during certain periods. These broad market fluctuations and other factors, as well as economic conditions
and quarterly variations in our results of operations, may adversely affect the market price of our common stock. In addition,
the spreads on stock traded through the over-the-counter market are generally unregulated and higher than on stock exchanges, which
means that the difference between the price at which shares could be purchased by investors in the over-the-counter market compared
to the price at which they could be subsequently sold would be greater than on these exchanges. Significant spreads between the
bid and asked prices of the stock could continue during any period in which a sufficient volume of trading is unavailable or if
the stock is quoted by an insignificant number of market makers. Historically our trading volume has been insufficient to significantly
reduce this spread and we have had a limited number of market makers sufficient to affect this spread. These higher spreads could
adversely affect investors who purchase the shares at the higher price at which the shares are sold, but subsequently sell the
shares at the lower bid prices quoted by the brokers. Unless the bid price for the stock exceeds the price paid for the shares
by the investor, plus brokerage commissions or charges, the investor could lose money on the sale. For higher spreads such as those
on over-the-counter stocks, this is likely a much greater percentage of the price of the stock than for exchange listed stocks.
There is no assurance that at the time an investor in our common stock wishes to sell the shares, the bid price will have sufficiently
increased to create a profit on the sale.

We have not paid, and do not intend
to pay, dividends on our common stock and therefore, unless our common stock appreciates in value, our investors may not benefit
from holding our common stock

We have not paid any cash dividends on
our common stock since inception. We do not anticipate paying any cash dividends on our common stock in the foreseeable future.
As a result, investors in our common stock will not be able to benefit from owning our common shares unless the market price of
our common stock becomes greater than the price paid for the stock by these investors.

There are a large number of restricted
shares and shares issuable upon exercise of our outstanding options, warrants, or other convertible instruments that may be available
for future sale, or which may be resold pursuant to Rule 144, the sale of which into our trading market may depress the market
price of our common stock.

As of November 8, 2012, we had
28,816,741 shares of common stock issued and outstanding, of which 26,415,202 were designated by our transfer agent as
restricted shares pursuant to Rule 144 promulgated by the SEC. In addition we had outstanding warrants to purchase up to
3,555,489 shares of common stock, outstanding options to purchase up to 4,262,500 shares of common stock, promissory notes
convertible into 6,530,481 common shares, and other contingent obligations resulting in the issuance of up to 2,098,699
common shares upon the occurrence of certain triggering events. The sale of these shares into the open market may adversely
affect the market price of our common stock.

30

Our board of directors can, without
stockholder approval, cause preferred stock to be issued on terms that adversely affect common stockholders.

Under our Certificate of Incorporation,
our board of directors is authorized to issue up to 10,000,000 shares of preferred stock, of which none are issued and outstanding
as of the date of this report. Also, our board of directors, without stockholder approval, may determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares. If the board causes additional shares of preferred stock
to be issued, the rights of the holders of our common stock could be adversely affected. The board’s ability to determine
the terms of preferred stock and to cause its issuance, while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our
outstanding voting stock. Preferred shares issued by the board of directors could include voting rights, or even super voting rights,
which could shift the ability to control the company to the holders of the preferred stock. Preferred shares could also have conversion
rights into shares of common stock at a discount to the market price of the common stock which could negatively affect the market
for our common stock. In addition, preferred shares would have preference in the event of liquidation of the corporation, which
means that the holders of preferred shares would be entitled to receive the net assets of the corporation distributed in liquidation
before the common stockholders receive any distribution of the liquidated assets. We have no current plans to issue any shares
of preferred stock.

Issuance of preferred stock and our
anti-takeover provisions could delay or prevent a change in control and may adversely affect our common stock

We are authorized to issue 10,000,000 shares
of preferred stock which may be issued in series from time to time with such designations, rights, preferences and limitations
as our Board of Directors may determine by resolution. The rights of the holders of our common stock will be subject to and may
be adversely affected by the rights of the holders of any of our preferred stock that may be issued in the future. Issuance of
a new series of preferred stock, or providing desirable flexibility in connection with possible acquisitions and other corporate
purposes, could make it more difficult for a third party to acquire, or discourage a third party from acquiring our outstanding
shares of common stock.

While we currently qualify as an “emerging
growth company” under the JOBS Act, we will lose that status at the latest by the end of the fifth anniversary of our first
sale of registered securities, which will increase the costs and demands placed upon our management.

We will continue to be deemed an emerging
growth company until the earliest of (i) the last day of the fiscal year during which we had total annual gross revenues of $1,000,000,000
(as indexed for inflation); (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale
of common stock under a registration statement; (iii) the date on which we have, during the previous 3-year period, issued more
than $1,000,000,000 in non-convertible debt; or (iv) the date on which we are deemed to be a ‘large accelerated filer,’
as defined by the SEC, which would generally occur upon our attaining a public float of at least $700 million. Once we lose emerging
growth company status, we expect the costs and demands placed upon our management to increase, as we would have to comply with
additional disclosure and accounting requirements, particularly if our public float should exceed $75 million on the last day of
our second fiscal quarter in any fiscal year following our first registered offering, which would disqualify us as a smaller reporting
company.

We are an “emerging growth company”
and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock
less attractive to investors.

The JOBS Act permits “emerging growth
companies” like us to rely on some of the reduced disclosure requirements that are already available to smaller reporting
companies, which are companies that have a public float of less than $75 million. As long as we qualify as an emerging growth company
or a smaller reporting company, we would be permitted to omit the auditor’s attestation on internal control over financial
reporting that would otherwise be required by Section 404 of the Sarbanes-Oxley Act, and are also exempt from the requirement to
submit “say-on-pay”, “say-on-pay frequency” and “say-on-parachute” votes to our stockholders
and may avail ourselves of reduced executive compensation disclosure that is already available to smaller reporting companies.

31

In addition, Section 107 of the JOBS Act
also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting
standards provided in Section 7(a)(2)(B) of the Securities Act as long as it is an emerging growth company. An emerging growth
company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private
companies. We have elected to take advantage of these benefits until we are no longer an emerging growth company or until we affirmatively
and irrevocably opt out of this exemption. Our financial statements may therefore not be comparable to those of companies that
comply with such new or revised accounting standards.

We will cease to be an emerging growth
company at such time as described in the risk factor immediately above. Until such time, however, we cannot predict if investors
will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less
attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile
and could cause our stock price to decline.

Some provisions of our charter documents
may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial
to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our certificate of incorporation
and bylaws could make it more difficult for a third-party to acquire us or increase the cost of acquiring us, even if doing so
would benefit our stockholders, or remove our current management. These provisions:

·

authorize the issuance of “blank check” preferred stock, the terms of which may be
established and shares of which may be issued without stockholder approval;

·

do not provide for cumulative voting in the election of directors, which would otherwise allow
for less than a majority of stockholders to elect director candidates;

·

prohibit stockholder action for the election of directors by written consent, thereby requiring
all stockholder actions to elect directors to be taken at a meeting of our stockholders; and

·

limit the ability of our stockholders to call meetings of stockholders.

These provisions may frustrate or prevent
any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace
members of our board of directors, who are responsible for appointing the members of our management. Any provision of our
certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit
the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price
that some investors are willing to pay for our common stock.

Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds

During the three months ended September
30, 2012, we sold the following unregistered securities that have not been previously disclosed in a prior report:

On August 28, 2012, the Company issued
50,000 shares of its common stock to a consultant for services. These securities were issued without registration under the Securities
Act by reason of the exemption from registration afforded by the provisions of Section 4(a)(5) and/or Section 4(a)(2) thereof,
and Rule 506 promulgated thereunder, as a transaction by an issuer not involving any public offering. The consultant was an accredited
investor as defined in Regulation D. These securities have not been and will not be registered under the Securities Act and may
not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. No selling
commissions were paid in connection with the issuance.

Item 4. Mine Safety Disclosures

There are no reportable events required
pursuant to this item.

32

Item 6. Exhibits

The following exhibits are furnished with
this report:

31.1

Rule 13a-14(a) Certification by Principal Executive Officer

31.2

Rule 13a-14(a) Certification by Principal Financial Officer

32.1

Section 1350 Certification of Principal Executive Officer

32.2

Section 1350 Certification of Principal Financial Officer

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.

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